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Big three brokers bounce back on cost cuts and expansion

The big three broker stocks have risen strongly over the past year as cost-cutting initiatives and expansion drives paid off in their 2010 financial results


Willis shares have gained the most over the past year, up 36 percent to $39.11 by mid-February.

MMC stock is close behind with a 35 percent rise to $30.75 (see graph).

Aon shares appreciated by 28 percent to $51.92 over the same period.

The gains have brought broker valuations back to median historical levels, Barclays Capital analysts noted in a recent research note on the sector.

The brokers probably had the best opportunity in the P&C sector to generate earnings growth through to 2012 as the global economy recovered, the analysts said.

This is particularly the case for MMC and Aon, which stand to benefit from any opening up of corporate wallets through their consulting operations as well.

Aon's business profile is now significantly altered after the $4.9bn merger with consulting giant Hewitt last year.

CEO Greg Case said the integration of Aon Hewitt was well underway with "exceptional" client reaction. "Cost savings related to our restructuring programmes and operational initiatives are expected to drive significant margin improvement," Case added.

But falling P&C prices could partially offset the benefits of improving organic growth, Barclays Capital added.

"Once P&C pricing turns positive (which we do not expect for several years), the insurance broker stocks should generate significant organic growth and margin expansion."

The big three have already seen modest revenue growth over 2010, led by MMC, whose Risk & Insurance Services segment lifted revenue by 9 percent to $5.8bn with underlying or organic growth at 2 percent, when it published its year-end financials last week.

However, Willis recorded the highest organic growth on commission and fee income at 4 percent year-on-year, helping to lift total revenues by 2 percent to $3.34bn.

The organic growth came from a 6 percent lift from new business, which offset a 2 percent drop due to declining premiums.

Meanwhile, Aon also posted a 2 percent rise in revenue from its Risk Solutions division to $6.4bn for the year.

But none of its expansion came from pre-existing business, as a final quarter surge in organic growth was not enough to overcome shrinkage during the first three quarters.

The Q4 3 percent improvement in organic brokerage revenue, however, was Aon's strongest rate of organic revenue growth for three years.

Aon's annual commission and fee income was up 2 percent to $3.67bn, while investment income dropped 26 percent to $55mn.

Willis also posted the highest adjusted operating margins, clearing 23 percent of its revenues compared to 21.8 percent in 2009.

Aon came in second with a 20.4 percent margin, up from 19.7 percent the previous year, while MMC's margin improved from 18.6 percent to 18.8 percent.

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